Money Matters: Couple seeks advice on life insurance coverage

Q. We are married with two children and finally have wills in place but we have not purchased any life insurance. My husband has about $150,000 on him and $50,000 on me through his work and it’s really cheap. We know that’s not enough coverage but after meeting with several life insurance agents we are confused about the amount and type of coverage we should buy. The three we’ve spoken with suggest a cash build-up type of insurance versus term due to the ability to borrow from the policy for college and or retirement What do you suggest?

A. Any type of cash value life insurance sold by an agent has the highest commission of almost any financial product offered, including annuities. Life insurance has two major functions: 1) replace the earning power of the family breadwinner(s) and 2) provide liquidity for an estate by guarding against the forced sale of assets under unfavorable conditions to meet the family’s current cash needs. The two main types of coverage are Term Life Insurance and Permanent Life Insurance such as whole, variable, or universal life.

Straight term insurance is pure protection; there is no cash buildup. It’s inexpensive because statistics show the odds are, you won’t die while you own it. Most term policies end at age 65 or 70. As you get older, life insurance needs should decrease. Paying for college is no longer an issue (unless you have a large outstanding debt), your mortgage will be reduced or nonexistent, and as you approach retirement, income replacement needs decrease.

Term insurance provides the protection you need at the lowest cost. Any money you have left after paying the lower premium should be invested toward retirement, college education, mortgage reduction, and other financial goals; no-load mutual funds are good investment vehicles for these long-term goals.

Annual Renewable Term (ART): 5-, 10-, 15-, 20 and 30-year-level premium/death benefit term and decreasing term are the main types. The shortest coverage period is going to be the least expensive, the odds of you dying within one year (ART) are much less than in 20 years (20-year level premium). I prefer the level premium term policies. You may pay a bit more in the first years, but you gain peace of mind. There is no worry about future medical underwriting and you know what to budget. Chose a sensible coverage period, for your situation a 20-year level term policy will provide the protection you need until your child completes high school.

It sounds like your husband has inexpensive term insurance through his employer. Consider this as a supplement to your basic coverage since most employer sponsored life insurance ends when you leave the company for any reason. If you want to work with an agent, find one that sees the benefit to you (not them) of buying term insurance versus permanent. If you don’t need an agent one no-load insurance company I’ve recommended to clients is Ameritas Direct (www.ameritasdirect.com).

“Investment” oriented life insurance has a place in your portfolio only if you have already purchased less expensive life insurance for protection and have accumulated sufficient funds through your stock and bond investment program to meet your financial goals. If you are concerned about estate taxes, you probably have enough money to buy permanent insurance even if you are older and in less than perfect health. The personal federal estate tax exemption for 2016 is 5.45 million dollars. So, no federal estate tax is owed on amounts under 5.45, and since it is now portable for a couple the exemption is 10.9 million dollars. Paying for a meeting with an objective financial adviser, estate planning attorney or tax professional may be worthwhile.